Average 401k balance by age
How does your 401k balance compare to your peers?
Tax advantage plans like 401k and Roth IRA are one of the simplest and best ways to invest for your retirement. Do you wish to know how much you need to contribute?
What is a 401k?
A 401k is an employer-sponsored retirement plan. Employees can automatically deduct a portion of their paycheck for retirement. 401k can supplement Social Security (SS) benefits since retirees’ expenses will fall short with just SS benefits.
Pros of 401k
Tax advantages: Traditional 401k savings are pre-tax. This means that your contributions are exempt from federal tax, and lower your taxable income. The catch is that the money that grew in the 401k account will be taxed upon withdrawal during retirement.
However, some employers will have a Roth 401k program. Roth just means that the money you are contributing is post-tax money, the money that grows in the account will be tax-free during withdrawal.
The rule of thumb is that if you are in a higher tax bracket now, it makes sense to go with traditional 401k. Since upon withdrawal, you’ll be in a lower tax bracket.
Employer match: Another perk to the 401k program is the employer match. This varies from company to company but averages around 5 to 6%.
Within the employer match, there is usually a vesting period.
Cliff vesting is when an employer required you to stay at the company three years in order to keep the employer match portion, or “being vested”.
Another way companies try to keep you is by having a vesting schedule. For example, if you left the company in one year you’ll only get to keep 50% of the employer match, 75% in year two, and 100% in year three.
Take advantage of the employer match, this is often referred to as “free money” since the funds did not come from the employee. A rule of thumb is to contribute enough to qualify for the full match if you’re unable to max out your 401k.
Lifetime contributions: Contrast to some other retirement accounts like IRA, there is an age limit to contributions. With 401k, as long as you’re working, you can keep on contributing.
However, there is the required minimum distribution (RMD) at age 70 1/2. At this age, you are required to start withdrawing funds, if not, you are subject to penalties.
DIY vs Professional Management vs target date
If you’re automatically enrolled in a 401k plan then you’re probably placed in a target-date fund. This is a fund that will allocate your portfolio based on your date of retirement. This is a good option to start, but one of the downsides is higher expense ratios. An example of a target-date fund is the JPMorgan SmartRetirement fund, the listed expense ratio is 0.888.
Another way is to get professional management from the likes of Advised Assets Group that uses Financial Engines technology. Their expense ratio averages 0.50.
Lastly is the do it yourself (DIY) way. This is my favorite method because I get to do my own fund picking and allocations. This is where I will utilize index funds and the three-fund portfolio method.
401k balance by age 20
I wish I know about investing in my early 20’s, specifically the power of compounding interest.
The chart above demonstrated the benefit of saving early. Assuming an 8% return, $250 monthly contribution, and time to maturity is at 65 years old.
|Starting age||Accumulation amount|
|Starting at age 25||$ 878,570|
|Starting at age 35||$ 375,073|
|Starting at age 45||$ 148,236|
So I hope the above chart convinced you to start putting your money to work as soon as possible. In your 20’s when you’re still trying to figure things out. Saving for retirement might be the last thing on your mind but start as soon as you can, your future self will thank you for it.
Aim to save at least 10% of your income for retirement. Still not convinced? See the below interactive chart for more data on your path to $1 million dollars.
In 2019 Fidelity released their 401k balances report (see chart at the bottom of the post), Fidelity looked at 30 million 401k balances and posted their findings according to age groups.
Based on the chart from Nerdwallet, going with the average market performance of 8%. In your 20’s, you need to save:
- $8 per day
- $241 per month
- $3,036 per year
401k balance by age 30
By the time you are 30, it’s recommended to have a 401k balance equal to one year’s salary. So for example, if you are a pharmacist making $126,000 a year, you’d want to have $126,000 in your 401k account.
If you missed the chance to put down any money in your 401k account in your 20’s, don’t worry, you still can start today. How much will you need to put aside? We’re still sticking with an 8% return rate.
- Daily saving of $12
- Monthly saving of $366
- Annual saving of $4,552
401k balance by age 40
By the age of 40, most people have stable jobs and have a significant increase in their income compared to their 20’s. By the age of 30, the rule of thumb is to have three years worth of salary saved in your 401k. So a pharmacist with a salary of $126,00 (keeping it simple, a pharmacist at this point may be making ~135k?) should have $378,000 in your 401k account.
401k balance by age 50
By age 50, it’s recommended to have five years worth of salary socked away. Let’s continue with the pharmacist, by this point, a pharmacist is probably going to be making $150,000 annually. So a pharmacist nearing retirement should have netted $750,000 in retirement funds.
Of note, during this age group, you are allowed to contribute more to the current maximum of $19,000 per year for 401k. This is called a catch-up contribution. You are allowed to add up to $6,000 per year more in your 401k (total $25,000) and $1,000 more than the maximum of $6,000 for IRA (total $7,000).
401k balance by 60
The average 401k balance for the age group of 60-69 is 195,500 and the average balance for 70+ is $182,100 (see chart above for more details). Interestingly, IRA balances from the age of 60 on are higher compared to their 401k counterparts. At this point, hopefully, you’ve got all your ducks in a row and is ready for retirement.
Equally as important, as you near retirement, it’s time to change the allocation of your index funds. Many experts recommend increasing your bond holdings and decreasing your stock holdings.
The rule of thumb is to subtract your age from 120 to get the right ratio. So for a 60-year-old should allocate 60% stocks and 40% bonds.
Entering this age group, it is probably best to start thinking about claiming your social security benefit.
How much do you need to retire?
According to the social security administration, your social security benefits will only likely replace 40% of your current salary. Speaking of SS, it matters when you claim your social security benefits. AARP has a calculator that can help you decide.
Did you know that you can create an account with the Social Security Administration? After you created the account, you can log in to see if you have enough credits to claim for benefits. You can see how much your spouse or children will get if you passed, they call this Social Security Survivor benefit. You can also see how much taxes you paid in Social Security and look for discrepancies to fix.
When it comes to retirement investing, it is important to use automation. For example, your 401k fund will be deducted automatically from your checks before you even get paid. Brilliant! It’s really important to not touch your funds and let time do the work for you.
Here are a few nuggets I just learned from CNBC, using the latest IRS data collected in 2016. More than 4.6 million taxpayers contributed the maximum amount in their 401k during the 2016 tax year. This number may seem like a lot but keep in mind that there were 140 million returns in 2016.
The greatest concentration is in the 45 to 55 age group.
Hopefully, you’re able to put away money in your 20’s and well on your way to a smooth retirement.
But it’s never too late, start investing for your retirement today! 2019 is the first year I am able to max out my 401k and I am really excited. Next up for me is to open a Roth IRA account with Vanguard and opt-in for a health savings account (HSA) for next year.
It’s important to monitor fees, high fees can certainly dampen your return of investment.
How did you compare to the average 401k and IRA balances?